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Success Analysis of Start-ups in the field of Microsystems and Nanotechnology in the UK

By

Devang Shah

MSc Microsystems Engineering Dissertation

Heriot-Watt University School of Engineering and Physical Sciences

Edinburgh United Kingdom

September 2004

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Success Analysis of Start-ups in the field of Microsystems and Nanotechnology in the UK

1. ABSTRACT................................................................................................... 4 2. ACKNOWLEDGEMENTS .................................................................................... 5 3. TABLE OF FIGURES ........................................................................................ 6 4. INDEX OF TABLES.......................................................................................... 7 5. INTRODUCTION............................................................................................. 8 6. SETTING THE SCENE : THE COMMERCIALISATION OF TECHNOLOGY.............................10

6.1 TECHNOLOGY LIFE CYCLE OF MICRO AND NANOTECHNOLOGY .......................................... 10 6.2 THE BACKGROUND: THE DEVELOPMENT OF MICRO AND NANOTECHNOLOGY IN UK....................... 10 6.3 TECHNOLOGY TRANSFER MECHANISMS:................................................................. 11 6.4 DEFINITION OF START-UP/ SPINOUT/ SPIN-OFF:....................................................... 11 6.5 TYPOLOGIES OF UNIVERSITY SPIN-OUTS ............................................................... 12 6.6 ISSUE: LICENSING OR SPIN OUT? ....................................................................... 12

6.6.1 Advantages of Spinouts over Licensing: 13 6.6.2 Advantage of Licensing over Spinouts: 13 6.6.3 Importance of the Spin-out to the University 13

6.7 PHASES OF THE UNIVERSITY SPIN-OFF PROCESS: ....................................................... 13 6.7.1 Phases of a Pre Start-Up: 14 6.7.2 Phases of a Post Start-Up: 15

6.8 DIFFERENT MODELS OF SPIN-OFFS ..................................................................... 17 6.8.1 Taking Equity Model Spin-off Company Model 17 6.8.2 Non Profit Buffer Models 18 6.8.3 Advantages 18 6.8.4 Disadvantages 18

6.9 FOR PROFIT MODEL................................................................................... 18 6.9.1 Alternative 1 18 6.9.2 Alternative 2 19 6.9.3 Advantages 19 6.9.4 Disadvantages 19

6.10 IP MANAGER MODEL .................................................................................. 19 6.10.1 Advantages 19 6.10.2 Disadvantages 20

6.11 ROLE OF BUSINESS INCUBATORS AND TECH-TRANSFER OFFICES......................................... 20 6.11.1 University Technology Transfer Activities: 20

7. RESEARCH DESIGN........................................................................................21 7.1 PURPOSE STATEMENT ................................................................................. 21 7.2 OVERALL APPROACH .................................................................................. 21

7.2.1 Sources of Data Gathering 21 7.2.2 Criteria for Selecting the Start-ups 21 7.2.3 Choice of Sample 21 7.2.4 Approaching the participants 22 7.2.5 Structure of the interviews 22

7.3 METHODOLOGY ....................................................................................... 22 7.3.1 Combination of Qualitative Analysis and Quantitative methods 22 7.3.2 Choice of qualitative and quantitative methods 23

7.4 APPLICATION TO THE SAMPLE.......................................................................... 23 7.5 START-UPS INCLUDED IN THE STUDY ................................................................... 24

8. DATA GATHERING AND RESULTS.......................................................................26 8.1 INTRODUCTION........................................................................................ 26 8.2 SUMMARY OF THE DATA COLLECTED.................................................................... 26

8.2.1 Formation of the Start-up 26

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8.2.2 Number of Employees 27 8.2.3 Source of Seed Funding 27 8.2.4 VC Funding Raised 29 8.2.5 Number of Patents Granted 30 8.2.6 Geographical Location 31 8.2.7 Composition of Management Board 32 8.2.8 Business Model Adopted 33

9. PERFORMANCE MEASURES AND SUCCESS ANALYSIS ................................................35 9.1 DISCUSSION: SUCCESS CRITERIA FOR THE START-UPS IN MICRO AND NANOTECHNOLOGY................. 38

9.1.1 Generic Model of Profit / Loss 38 9.1.2 Case Study of a high growth start-up : Cambridge Display Technology Ltd 39

9.2 SUCCESS FACTORS FOR MNT START-UPS IN UK........................................................ 41 9.2.1 Management of the Start-up 41 9.2.2 Affiliation with the University: 42 9.2.3 Financial Aspects 43 9.2.4 Target Market 44 9.2.5 Cluster Formation – Incubators: 45 9.2.6 IP Position: 45 9.2.7 Strategic Partnering : 46

9.3 DISCUSSION: PROBLEMS FACED BY THE START-UPS ..................................................... 46 9.3.1 Lack of Credibility 46 9.3.2 Lack of Funding: 46 9.3.3 Changes in the tax structure for University Spin-outs: 47 9.3.4 Underestimation of the time to market: 47 9.3.5 Lack of Exit: 47 9.3.6 Creating new markets: 48 9.3.7 Lack of Focus: 48 9.3.8 Lack of Understanding of Venture Capital: 48

10. CONCLUSIONS............................................................................................50 11. LEARNING AND REFLECTION ..........................................................................52

11.1 OVERVIEW: ........................................................................................... 52 11.2 CHOICE OF PROJECT: ................................................................................. 52 11.3 SKILLS LEARNED IN BUSINESS RESEARCH: .............................................................. 52 11.4 TOPICS THAT WOULD MERIT FOLLOW-UP: .............................................................. 53 11.5 THE FUTURE USE OF THE PROJECT:.................................................................... 53

12. APPENDIX.................................................................................................54 12.1 TEMPLATE FOR COMPANY DATA COLLECTION FORM .................................................... 54 12.2 CASE STUDY 2: MICROEMISSIVE LTD ................................................................... 56 12.3 CASE STUDY 3: SOLEXA LTD .......................................................................... 56 12.4 TABLE OF THE COMPANY DATA COLLECTED ............................................................ 59

13. REFERENCES .............................................................................................67

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1. ABSTRACT

This study analyses the start-up activity in the field of Micro and Nanotechnology in the United Kingdom. It was found from this study that much of the commercialization of Micro and nanotechnology will be via this path. 60 Start-ups were analysed and based upon their analysis, factors responsible specifically for the success of the Micro and Nanotechnology (MNT) start-ups have been empirically and theoretically derived. Since majority of the MNT start-ups are university spin-outs, this research also studies the university technology transfer mechanism in depth. Also, an attempt has also been made to identify the risk factors, barriers being faced and resources available to these start-up companies that are likely to contribute to their success.

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2. ACKNOWLEDGEMENTS

This MSc thesis dissertation is a result of my summer internship at Technology for Industry Ltd, Cambridgeshire, UK. Technology for Industry Ltd is a technology transfer company specialising in the field of Microsystems and Nanotechnology. I would like to express my thanks to all those who helped me with this project. Dr J Malcolm Wilkinson, who gave me the opportunity to undertake this study under his excellent guidance. Working under an experienced professional like him gave me a lot of exposure to the world of Business. Dr Resh Dhariwal has been very helpful and co-operative as my course director. Dr Marc Desmulliez gave an excellent talk on Business in Microsystems in my MSc which largely inspired me to take on this project. Mr Fabien Holler (DTI) who has always been a great source of help with his useful inputs. All my Colleagues during my summer at TFI Ltd: A special thank you each one of you for a very memorable summer at Littleport. Sarah Norman Julie Armstrong-Tait George Adamson Linda Mahoney Kalyan Sarma Dan O’Neil Sue Higgins Kevin Yallup Finally, I would like to thank each of the participating start-ups for providing me valuable insight for preparing this study.

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3. TABLE OF FIGURES

Figure 1: Technology Lifecycle of Micro and Nanotechnology (Source: TFI Ltd) .......................... 10 Figure 2 : Worldwide Government Investments in MNT Sector (Source: DTI Report 2004) .............. 10 Figure 3: Phases of University Spin-off Process................................................................. 14 Figure 4: Credibility Carousel (Source: Sue Birley, 2003)..................................................... 15 Figure 5: Taking the Equity Spin-Off model..................................................................... 17 Figure 6: Non Profit Buffer Spin-off model...................................................................... 18 Figure 7: For Profit spin-off model 1............................................................................. 18 Figure 8: For profit spin-off model 2............................................................................. 19 Figure 9: IP Manager Spin-off Model ............................................................................. 19 Figure 10: Formation of the Start-up ............................................................................ 26 Figure 11: Number of Employees ................................................................................. 27 Figure 12: Source of Seed Funding ............................................................................... 27 Figure 13: VC Funding Raised by start-ups ...................................................................... 29 Figure 14: Number of Patents Granted .......................................................................... 30 Figure 15: Geographical Clusters in MNT........................................................................ 31 Figure 16: Business Model Adopted............................................................................... 33 Figure 17: Age vs. Number of Employees vs. Venture Capital Raised....................................... 35 Figure 18: Generic model of Profit / Loss....................................................................... 38 Figure 19: Comparative graph of CDT Ltd....................................................................... 40 Figure 20: Cumulative Profit/Loss of CDT Ltd .................................................................. 40 Figure 21: Cumulative P/L of Microemissive Ltd ............................................................... 56 Figure 22: Comparative Graph for Solexa Ltd .................................................................. 57 Figure 23: Cumulative Profit/ Loss Graph of Solexa Ltd ...................................................... 58

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4. INDEX OF TABLES

Table 1: Start-ups included in the Study ........................................................................ 25 Table 2: SMART Award Categories................................................................................ 28 Table 3: Selected High Growth Start-ups ....................................................................... 36 Table 4: Selected Slow Growth Start-ups ....................................................................... 37 Table 5: Companies No longer trading in MNT ................................................................. 38 Table 6: Financial Table for CDT Ltd ............................................................................ 39 Table 7 : Financial Table for Microemissive Ltd................................................................ 56 Table 8: Financial Table for Solexa Ltd.......................................................................... 57

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5. INTRODUCTION

Perhaps Micro and Nanotechnology is the latest technology bubble with 100’s of new start-up companies being formed every year. Consequently, the Micro and Nanotechnology sector has attracted significant funding from the Venture Capital community all around the world. In the recent years, there have been a number of technology investment bubbles where the VC’s piled into the latest trendy area without any sound rational judgement. Even within micro and nanotechnology there have been several ‘bubbles’ including Photonics (1998-2001) and RF MEMS (2001-2004). In each bubble a common pattern has emerged:

Unrealistic expectations of market size and growth are created. Investors are attracted by the projected financial growth in the sector. Many companies pile into the sector, the majority being start-ups with poorly defined

business models and overlapping offers competing for the same market.

Many start-ups have a limited technology portfolio, which cannot provide a complete product solution.

Companies consume the VC Funds without achieving significant income generation. The bubble finally bursts and a painful shakeout occurs with very few start-ups surviving.

Hence, a current market analysis of the start-ups specifically directed to the field of Micro and Nanotechnology (MNT) would be very interesting. In the UK, as in other parts of the world including the USA, it was found from this study that the Micro and Nanotechnology start-ups are mostly university spinouts. Universities and research institutions are far more entrepreneurial now than they used to be in the early 1990’s. The University spinouts constitute a complex phenomenon within the entrepreneurship field. They are companies, which evolve from universities through commercialisation of intellectual property and transfer of technology developed within academic institutions (Birley, 2002). Despite the importance of start-ups as possible sources of wealth creation and job opportunities in the economy (Steffenson et al, 2000), a relatively small number of studies focussed on start-ups and more specifically on university spin-outs. (Nicolaou & Birley, 2003a). One important reason is the lack of a representative sample because the nascent entrepreneurs are unregistered, which makes them difficult to sample in comparison to small business owners (Reynolds, 1997). Spinning off new ventures from research institutions has played a key role in the development of high-technology clusters such as Boston, Silicon Valley and Cambridge. Also in Europe, the phenomenon of spin-out – companies created to commercialise technologies developed in research institutions- is not new. Some well known large firms were started by scientists in the 19th century or the early part of the 20th century. Werner von Siemens and Gerard Philips set up spin offs which would later develop into well known multinationals (Mustar 1995). However, these spin-offs did not result from structural process of research commercialisation. Often these companies were founded by entrepreneurs despite the research institute with which they were associated. Only recently, research institutes have devised “proactive” policies to stimulate the commercial exploitation of public research, through spin out formation (European Commission 1998). In parallel, there have been changes in the institutional environment to make such a policy possible: laws have been changed to assign ownership of intellectual property to research organisations. Employment laws have been loosened to allow public sector researchers to establish contact with the private sector and various initiatives have been introduced to provide early stage start-up capital. Despite these changes, detailed knowledge of the processes of proactively spinning out new high technology ventures from research institutions remains scarce. Roberts and Malone (1996) stress in a pioneering article that the process of spinning – out ventures from research

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institutions is very different compared to the entrepreneurial environment of Cambridge, Boston or Silicon Valley. In developed contexts, such as the latter three examples, there is already a strong entrepreneurial community with the capability to select the best projects and allocate resources to them. So, the spin-off process can follow a “market-pull” process, which is not dependent on the activities of research institutions alone. Instances where no strong entrepreneurial community is present, research institutions need to be more proactive and supportive of spin-off projects. Here the process is more “technology push” – in which research institutions exercise selection and provide support. An understanding of how many start-ups exist as well as how many are created or disappear in any given time period has turned out to be a major challenge. One of the major questions addressed in this report: Which factors contribute to success or failure in starting a business in the field of Micro and Nanotechnology? This question is vital for several stakeholders:

Entrepreneurs considering high-tech ventures have an interest in knowledge of factors that contribute to success or failure in the start-up phase. Armed with this knowledge, they can evaluate their own prospects and potential pitfalls.

A high level of entrepreneurial activity has been shown to contribute to innovative activities, competition, economic growth and job creation (Carree and Thurik, 2003). Promotion of entrepreneurship can benefit from the insight into factors that contribute to success or failure in the start-up phase.

There are too many possible candidate variables that might explain why a start-up in MNT did not take off and the available data do not allow any serious statistical test. Examples of UK start-up companies have been provided to support the analysis and also supplemented with US start-ups where necessary. It is seen that most of the factors applicable to the high technology sector in general hold true for the relatively niche Micro and Nanotechnology sector as well. The study sets out to explore the options available to the companies in the MNT sector and to attempt to determine what actions are likely to contribute to success.

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6. SETTING THE SCENE : THE COMMERCIALISATION OF TECHNOLOGY

6.1 Technology Life Cycle of Micro and Nanotechnology

Figure 1: Technology Lifecycle of Micro and Nanotechnology (Source: TFI Ltd)

The above graph shows how a Micro and Nanotechnology undergoes various phases in its lifecycle. Micro technology products like accelerometers and pressure sensors have now reached the main stream market. In the past the sector has undergone several Shake-outs, and as a result many micro technology start-ups were being acquired by larger firms. It is seen that Nanotechnology is in a phase where majority of the firms active are starting up new ventures. Though Micro technology is a relatively matured industry compared with Nanotechnology, many start-ups are still seen currently active in this area as well.

6.2 The Background: The development of Micro and Nanotechnology in UK.

Figure 2 : Worldwide Government Investments in MNT Sector (Source: DTI Report 2004)

* Over a period of 6 years *1 over a period of 3 years

Government Committed Investment into Micro and Nanotechnology

124

414

58 41.5 21 30 33 41

249

456

166

564

153

48 37

124

374

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The graph shows that the UK has the second highest funding level in MNT Sector in Europe after Germany. In July 2003, Science and Innovation Minister Lord Sainsbury announced a cash injection of £90 million (124 Million Euros) over the next six years to help industry harness the commercial opportunities offered by nanotechnology. Within this initiative, the DTI has allocated £50m for an applied research programme that will support collaborative research and development projects and technology transfer initiatives, and £40m for Capital Projects for a UK Micro and Nanotechnology Network. Against this background, a series of initiatives were taken to further develop research and commercial activities, primarily through the creation of science parks or more generally- aggregation of academic and industrial researchers to promote collaborative research and act as incubators for academic spin-offs. Despite these efforts, very few firms are engaged in significant research activities and their innovativeness is far lower than that of USA. Very few firms account for a large proportion of Nanotechnology patents and innovation rests essentially on the activities of a small group of large/ medium sized established companies. As a consequence, the UK performance as a whole remains far behind that of USA. Having said that, the British performance in general is much better than its other European Counterparts with the exception of Germany. In the UK, Start-up activity in the field of Micro and Nanotechnology has been strongly concentrated in Cambridge as seen from the findings.

6.3 Technology transfer mechanisms: Before academic research results can be commercial applied, the technology or knowledge has to be transferred from the research organisation to industrial adopters. This Process is referred to as technology transfer. Any managed technology transfer activity is likely to be both costly and peripheral to the main purpose of the university, which is to develop and disseminate knowledge. It would also require a different form of managerial structure and style than the rest of the institution. In other words, it is akin to a corporate venture. Rogers et al (2003) identified the following 5 different technology transfer mechanisms with decreasing commercialisation value:

Spin-offs Licensing to existing companies Cooperative R & D agreements Teaching and publication Interaction and co-operation

6.4 Definition of Start-up/ Spinout/ Spin-off: Start-ups: A start-up is a new business venture in its earliest stage of development. Spin-outs or Spin-offs1: A Spin-off is the division of an existing parent organisation into one parent and one or more independent company(s).

1 Spinout and Spin-off are synonyms of each other and are used interchangeably

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Spin-outs or Spin-offs can be classified into various categories:

1. Internal Spin-Offs

2. Disinvestments/Restructuring Spin-offs - Sell-off - Buy-Out - Equity Spin-Off

3. Entrepreneurial Spin-off

- University/ Research Based Spin-Off - Corporate Spin-Off - Indirect Spin-Off

It was later found in the report that most of the spin-outs in the Micro and Nanotechnology sector are University based Spin-outs, hence importance is given in studying the mechanism of University Spin-outs. University spinouts: They are start-ups created to exploit commercially some knowledge, technology or research results developed within a university. The founding members of the spinout may or may not be currently affiliated with the academic institution.

6.5 Typologies of University Spin-outs Nicolaou and Birley (2003) proposed a tichotomous categorization of university spinouts:

Orthodox Spin-out: It is a company formed by one or more academics, all of whom have contributed to the IP. They leave the university to form the company and the break is clean. It is a kind of Management Buy out (MBO) and the founders are often called as academic entrepreneurs. Both the academic inventor and the technology are spinning out.

Technology Spin-out: This spin off type is more akin to Management Buy in (MBI). An Outside investor/manager buys or leases the IP from the university and forms a new company. The inventor academics continue with their research and have nothing to do with the day- to – day management of the company, although they may hold equity or act as consultants.

Hybrid Spin-out: This is the most common and the most complicated within the university context.

It arises where one or all of the following apply: - Only a subset of those who have contributed to the IP become the shareholders

of the company. - Some of the founders of the company may stay in the university and have a role

in the company, while the others may spin out with the company. Those who stay in the university may be a director of the company, sit on the scientific advisory board or act as a part time paid consultant.

- One or more of the founders take a sabbatical from the university to start the company.

6.6 Issue: Licensing or Spin out? One main issue faced by the university is to decide whether to license the technology or to spinout in form of a venture. Several researchers examined the advantages and disadvantages of university spinouts and the reasons for universities preferring them to licensing. The university’s use of equity is positively correlated to the university’s prior experience with technology transfer, to their success in relation to other institutions, and to structural characteristics related to the university type.

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6.6.1 Advantages of Spinouts over Licensing: Spinning out ventures instead of licensing is said to give more flexibility to licensing

managers in structuring deals

There is a Possibility that the university will still hold something of value if their technology is replaced

It can be said that reduced time can be required to generate revenue as compared to a traditional licence in start-ups which are in the supply change of a matured product. The equity investments also provide the same development incentives as royalties because both are based on output sales. (Bray and Lee, 2000)

6.6.2 Advantage of Licensing over Spinouts: Licensing of commercially relevant technologies to industry has the advantage of being

less resource-intensive than spinning out new companies – both in terms of people and funding.

Does not involve change in the career path of the academic.

6.6.3 Importance of the Spin-out to the University The changing role of the universities towards commercialisation activities combined with governmental and institutional support mechanisms is creating a fertile ground for the seeds of university spinouts. The rising number of universities involved in commercialisation activities such as licensing and spinning out has been well reported and documented in several surveys. The Universities Companies Association (UNICO, 2001) survey and the AUTM survey (AUTM, 2002) showed that academic institutions in the US and the UK are creating company spinouts at an increasing rate. The number of patents and licences in the last decade has almost tripled whereas the start-up activity among universities almost doubled (AUTM, 2002). The success of the spin off has the following benefits:

Enhances the reputation of their parent helping them to attract students, faculty and funding.

If a university holds equity position in a spin off or has licensed key intellectual property, the monetary benefits can be substantial.

These firms contribute to innovation, growth, employment and playing a critical role in the development of high technology clusters.

University based spinouts are found to be very robust having significantly higher survival rates than other start-ups. (Mustar 1997; AUTM 2001).

6.7 Phases of the university Spin-off Process: The process from academic research and knowledge to a profitable new venture is cumbersome. First, a business opportunity has to be identified or created based on academic research and knowledge. Second, the identified opportunity has to be pursued, and resources to develop the opportunity acquired. Third, the process of developing a new venture has to succeed. Entrepreneurship is central throughout the process, and the university spin-of becomes a result of continuous entrepreneurial action.

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Figure 3: Phases of University Spin-off Process

The linear model shown above is called the Relay Race Model in which each stage progresses only after the previous stage has been completed. However, in practise, the Football Model is more likely to be followed in which there is no linear relationship between the stages. Even as the university spin-off process takes place inside an organisation, the importance of individuals and opportunities are recognised as crucial (Greene, Brush and Hart, 1999).Focusing on opportunities, individuals, and the university as context for new venture formation, the following section deduces a model of the university spin-off process.

6.7.1 Phases of a Pre Start-Up: Science Project Status: Opportunity identification and Business idea generation from research The necessary first step in order to start the entrepreneurial action is the identification or creation of an opportunity. There might be more or less favourable conditions for creating opportunities, but the actual identification of an opportunity is always done by an individual or a group of individuals and taking place in a particular context of time and place. According to Ardichvili et al (2003) the concept opportunity recognition encompasses here distinct processes of perception, discovery and creation.

1. The perception of market needs. 2. The discovery of a ‘fit’ between market needs and resources that might fill those needs. 3. The creation of a business concept to utilize the discovered fit between resources and

needs. It is generally a concept, piece of research, or a laboratory project which is under the supervision of academic staff and needs articulating before it can be presented to the university’s technology transfer office or external parties to support further preparation for the next phase. Commercial Feasibility or Service: A feasibility study to check the potential for converting the technology project into a commercial product or service , identifying its business potential, providing a detailed business plan , including financials , headcount and capital resources required , skills , milestones and roadmap of how the technology can be converted and exploited in the form of product or services to successfully reach the next phase. Sue Birley who has done research on spinouts from Imperial College, London (2003) has given the theory of breaking the Credibility Carousel.

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Figure 4: Credibility Carousel (Source: Sue Birley, 2003)

Even in the development stage of a research idea, the entrepreneur will increase their chances of raising resources if they are able to establish both their research credibility and their understanding of the potential market opportunities. However, should the entrepreneur wish to go a step further and build a company from intellectual property that has a scientific, technological or biomedical base , they will require two proofs, namely proof of market concept and proof of technology concept. There are four critical junctions with increasing complexity which a spinout must pass in-order to progress to the next phase.

Opportunity Recognition Entrepreneurial commitment Threshold of credibility Threshold of sustainability

6.7.2 Phases of a Post Start-Up: Seed Stage A: At this stage the companies might have researched and developed an initial business plan and need seed funding to create a model or a demonstrator (but not a working prototype yet), validate the business plan with detailed financial analysis, identify the founding team (but not recruited), and research and prepare (but not file) key patents. The Market space or sector in which the idea or assertion can be exploited is clearly defined. These activities are generally funded by internal university/organisation resources or Government Grants. At this stage the company would have also identified potential external partners that may co-fund or license the technology. Seed Stage B: In the next stage the company validates its business, product or service strategy with one or two prospective customers by successfully demonstrating a model and needs. Seed funding allows the company to fully develop a working prototype or functional prototype, recruit one or two additional team members or pay sub contractors, and file the initial paperwork for key patents. Documentation, papers or presentation is presented in a way that can easily be understood by the non-academic community such as R & D, marketing and business development managers at commercial organisations The Company will also have started but not fully engaged external corporate finance and legal advisors in order to prepare for the first round VC Funding. At this stage, the company would be fully independent from the university, although the university would have a sizeable share of the equity and may elect to have board representation. The company would be run on a purely commercial basis, and would be open to merger and acquisition activity, perhaps partnering with other universities (if required) to meet the objectives. At this point, majority of the staff will be domain experts from the private sector, and some academic staff will have to decide whether to exit the company to return to academia or stay on and be measured on a commercial basis.

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First Round Funding: A company that has successfully demonstrated its model or prototype to potential customers , partners needs first round funding (convertible shares in return) to fully develop the product or service , which can be delivered to pilot customers for sampling, evaluation and design-in. The first round of funding will pay for the required infrastructure like lab, capital equipment, tools and facilities including the personnel cost of the core team and sub contractors. The first round of funding should be sufficient to pay for the minimum sales, marketing and finance/admin personnel, to facilitate the agreed funding milestones such as signed number of pilot customers, partners, number of staff and patents. The company may generate some nominal revenue from its pilot activities. Second Round Funding: The company would have successfully developed its first product or service and have acquired the first few pilot customers and partners. Second round funding is required to convince more potential customers that sufficient capital is available to fulfil the terms of the orders or contracts. Second round funding will also allow the company to expand its sales, marketing, customer support, finance and admin personnel, as well as expand its markets, products and services. Second round funding is intended to allow the company to reach a break-even position and achieve a critical mass of customers and market presence. Third Round Funding: The company would have reached a critical stage with its products, services, customers, and market presence and needs third round funding to consolidate its resources and market presence. Third round funding will allow a company to make a potential acquisition or merger with a bigger organisation, or alternatively position itself for a successful exit via trade sale or initial public offering (IPO) via listing on a recognised share exchange such as the AIM or NASDAQ. Pre-Exit Stage: A company that has successfully attained the pre-requisites for a successful IPO or trade sale. Pre exit status can co-exist with any one of the above phases depending upon the market sentiment. This Study indicated that four alternatives are most commonly present which agrees with Reynolds & White (1997)

Active Start-up, continued efforts to implement new firm Dormant Start-up, no current efforts underway, but start-up has not been abandoned Abandoned start-up, not successful and no further efforts are expected The start-up has become an infant business.

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6.8 Different Models of Spin-offs Different models of the University Spin-outs arise due to the difference in the entrepreneurship cultures at the universities. (Source: Spinning off in the US, Carnegie Mellon University, 2002) The following section describes the different models that were observed:

6.8.1 Taking Equity Model Spin-off Company Model

Figure 5: Taking the Equity Spin-Off model

This is the simplest model in which the Research Institution licences the Intellectual Property to various companies and in return receives equity in the company.

6.8.1.1 Advantages Replication after established policy Diversification of portfolio Equity build up over a period No up-front investment in the company Does not depend on one technology for returns

6.8.1.2 Disadvantages Little control over the company Equity dilution Large Portfolio management overhead cost Case-by-case negotiations Messy (relations with inventors)

6.8.1.3 Issues Inventor share distribution Degree of management involvement Exercising voting rights Board of Director membership Anti dilution opportunities Liquidation policy Limits to percent of ownership

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6.8.2 Non Profit Buffer Models

6.8.2.1 Non Profit Buffer Models - Alternative 1

Figure 6: Non Profit Buffer Spin-off model

6.8.3 Advantages Maintains control Provides initial buffering Can provide markedly increased flexibility

6.8.4 Disadvantages Still has non-profit status Hard to attract capital Still removed from marketplace

6.9 For Profit Model

6.9.1 Alternative 1

Figure 7: For Profit spin-off model 1

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6.9.2 Alternative 2

Figure 8: For profit spin-off model 2

6.9.3 Advantages Immediate entry into market Can attract capital “Rheostat” on control

6.9.4 Disadvantages Sometimes little buffering Often loss of control High legal costs Often high cost

6.10 IP Manager Model

Figure 9: IP Manager Spin-off Model

6.10.1 Advantages Little cost to institution Low risk (but low return) Arms-length deal with faculty Ability to gain critical mass, econ of scale

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6.10.2 Disadvantages Low return “Cherry picking”

6.11 Role of Business Incubators and Tech-Transfer Offices A Business incubator is an organisation that accelerates and systematises the process of creating successful enterprises by providing them with a comprehensive and integrated range of support, including: Incubator space, business support services, and clustering and networking opportunities. By providing the clients with services on a ‘one-stop-shop’ basis and enabling overheads to be reduced by sharing costs, business incubators significantly improve the survival and growth prospects of new start-ups. A successful business incubator will generate a steady flow of new businesses with above average job and wealth creation potential. Differences in stakeholder objectives for incubators, admission and exit criteria, the knowledge of projects, and the precise configuration of facilities and services, will distinguish one type of business from another.

6.11.1 University Technology Transfer Activities: The university technology transfer offices have an important role to play in the commercialisation of the technology. The main activities are:

Patenting and licensing of university intellectual property Research Partnerships with industry Industrial affiliate or liaison programs Technical/managerial assistance programs Business incubators Research parks Venture capital/business start-up activities Continuing Education

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7. RESEARCH DESIGN

7.1 Purpose Statement The purpose of the data collection exercise was to gain first hand information on the foundation of and strategic options available to start up companies within the Micro and Nanotechnology sector in the various phases of growth in UK. Findings obtained from these organisations would then be analysed with theories covering these areas and a set of success criteria would be derived from them for different phases of the start-ups.

7.2 Overall Approach The MNT sector in the UK comprises around 80 or so start-ups. However, because of the relatively nascent nature of these start-ups, it is very difficult to find data for some of them. This reduced the target group to about 60, and still data was missing for a few of them. It was decided that for a target group of this size and nature, only quantitative analysis would be inappropriate and would be unlikely to produce meaningful findings. Therefore a combination of quantitative and qualitative approach was felt to be more applicable, with data collection by means of semi structured interviews. The companies were divided into high growth and low growth groups; and then a detailed analysis of these few selected companies was done.

7.2.1 Sources of Data Gathering Data on each organisation was collected through a variety of techniques including personal interviews with several persons in the start-ups and secondary data sources such as annual reports, websites, description of the start-ups in the press, Companies House database research, conference proceedings and exhibition catalogues.

7.2.2 Criteria for Selecting the Start-ups The first stage involved large-scale screening to identify Micro and Nanotechnology companies which were formed in the last 12 years or attempting to start. Most of the start-ups were found to be less than 5 years old. Micro and Nanotechnology areas included were:

Bio nanotechnology Characterisation and Metrology at the micro and nanometre scales Manufacturing scale fabrication of polymer and glass components, such as microfluidic

devices

Nanomaterials (including nanocomposites and nanostructured materials) Nanoparticles Silicon and Polymer MEMS and micro device fabrication Micro optics

Under this definition, there were about 60 companies in the UK. These were either autonomous start-ups or university spinouts or sponsored by an existing firm. The data was validated on age of the company, business activity and origin of foundation. This data was later further divided into high growth, low growth and medium growth start-ups. Also 3 companies who had ceased trading were also included.

7.2.3 Choice of Sample The sample unit was the company and within this, key individuals with knowledge of the company’s strategic development. The choice of company within the total population was largely random, but was influenced by the personality of key individuals (willingness to grant

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access). However, the sample was broad enough to be representative of the population as a whole, covering a mixture of company ages, sizes, locations and product types. The preferred interviewee within each company was the founder or someone with a broad overview of the company’s development.

7.2.4 Approaching the participants Once the screening procedures were completed, the follow-ups to initial email approaches were made by telephone. The second stage of data collection involved detailed phone or email interviews with the managing directors and the founders. This exploratory phone interview was undertaken in each of these cases to analyse the extent to which the spin out had developed. The questionnaire is included in the appendix section. The sensitive nature of the industry and the level of confidentiality involved required that considerable care was taken in gaining access to the participants.

7.2.5 Structure of the interviews The interview was structured fairly loosely to allow interviewees to expound on issues they felt were important to the subject, maintaining the interview within defined limits. A one page summary of the topics was given out in advance and clarification was sought that any sensitive areas could be avoided at the interviewee’s request. A few interviewees’ were reluctant to disclose venture capital funding issues and surprisingly also Intellectual property information (since IP information, once registered is made public). Semi structured interviews where all the questions are not prepared before hand, is a fairly common qualitative approach where the interviewer does not have a predetermined theory or defined ideas about what is likely to arise from the interviews. The design involved resolving a number of technical issues and optimising a number of desirable, though often incompatible, features. Among these issues were choices between the sample size versus the amount of information assembled from each start-up; the scope of information to be included in the interviews versus the desire to keep respondents involved over multiple data collection activities; which type of items were best suited for which type of interview, phone or self-administered; and the simplicity of the interview items versus the complexity of the research concepts. The central dilemma becomes one of trying to obtain enough information for useful analysis, but not so much that they withdrew from the study. Respondent ‘fatigue’ – or willingness to endure long interviews – is a constant concern. When a great deal of material is required for research objectives, there are several ways to reduce ‘perceived’ respondent burden. First, it is important to have the wording and item flow designed to minimise confusion and uncertainty for the respondent. A great deal of pre-testing was completed to achieve this. Secondly, it helps if a preliminary background study of the area of activity is performed. Sensitive questions about annual turnover and venture capital funding raised are more likely to be answered where a good rapport has been developed between the interviewer and the respondent. A copy of the questionnaire used is given in the Appendix 12.1

7.3 Methodology

7.3.1 Combination of Qualitative Analysis and Quantitative methods Most of data to be gathered came from a combination of qualitative and quantitative data. Where ever possible, data was tried to quantify. The reasons for this are:

There were a number of variables to be considered in terms of size, management background, type of product, and links with the university etc, which need to be considered. These are expected to show up in the results obtained but could well be lost if quantitative methods were used solely.

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The objective of the project was to determine the factors in the MNT sector, which contribute to the success of the organisations involved, which may not be easily quantifiable. It was felt that this can only be achieved by looking at the data in detail and by paying particular attention to anomalies and unusual or unexpected responses. But Quantitative methods were used for preliminary segregation of the high growth and slow growth companies in terms of size of the company, Venture capital raised and age of the company. After the companies were identified into high growth and low growth groups, a detailed analysis of these selected companies was done. 8 high growth , 4 slow growth and 3 companies which had ceased trading were selected for further analysis.

Hence a combination of Qualitative and Quantitative methods was felt necessary.

7.3.2 Choice of qualitative and quantitative methods A combination of Qualitative and Quantitative methods was used in the study. Quantitative Approach: Statistical graphs were plotted from the data collected. A graph of the (Age of Start-up vs. Number of Employees vs. Venture Capital Funding) was used for distinguish High growth from low growth companies. Detailed statistical analysis was not possible for the data set of this size and nature. Qualitative Approach: However for the Qualitative Methods, It was felt that an approach such as grounded theory could provide a robust framework for analysis with the resources available. Grounded theory was conceived by Glaser and Strauss in 1967 and is useful where the researcher does not have a pre-conceived theoretical framework. Essentially under this method, the findings of the research constitute a theoretical formulation of reality. i.e. the theory is derived from the observations rather than having been decided before hand. Easterby Smith ET all (1991) suggests this approach is especially useful when data is collected in the form of transcripts, where the key features are usually:

Large volumes of raw data A lack of standardisation in the nature of the data Key items appearing in the transcripts which had not been expected beforehand

Easterby Smith ET all suggests a seven- step approach to data analysis:

Convert rough notes to written notes Ensure interview notes are referenced Start coding data as soon as possible Start grouping codes into smaller categories Write summaries at stages Use summaries to construct generalisations Continue until satisfied

7.4 Application to the sample Transcripts were written shortly after each of the interviews. The transcripts were kept as close to the original words used as possible. The interviews were held over a fairly short space of time and soon after the majority had been completed and transcribed, each transcript was reviewed again carefully, looking for common threads which could be categorised.

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As a result, the following categories were identified:

University Affiliated Support from venture capital providers Year of Foundation Products and Services Markets and Business Growth Investment and Financing Organisation and Personnel Patents and Intellectual Property

A template of the data collection form is included in the Appendix 12.2

7.5 Start-ups included in the Study

No. Name Of The Start-Up/Spin-Off Year Established Affiliated University

1 3D Molecular Sciences Ltd. 2001 Imperial College, University Of Hertfordshire

2 Adaptive Screening 2001 Imperial College, Univ Of Glasgow

3 Adelan 1996 Birmingham And Keele Universities 4 Advanced Optical Technology 1999 Independent

5 Advanced Technology Coatings Ltd 1999 Independent

6 Akubio Ltd 2001 University Of Cambridge 7 Amcet Ltd 2000 University Of Dundee 8 Blaze Photonics 2001 University Of Bath 9 Cambridge Display Technology 1992 University Of Cambridge 10 Cambridge Lab On A Chip Ltd 2003 University Of Cambridge 11 Casect Ltd 1999 Imperial College 12 Ceres Power Ltd 2001 Imperial College 13 CVD Technologies Ltd 2000 University Of Salford 14 Deltadot 2000 Imperial College 15 Durham Magneto Optics Ltd 2002 University Of Durham 16 Epigem Ltd 1995 University Of Durham 17 Farfield Sensors Ltd 1997 University Of Durham

18 Farlfield Photonics Ltd 2001 Farfield Sensors/University Of Durham 19 Genapta Ltd 2001 University Of Cambridge 20 Gencoa Ltd 1994 Independent 21 IMPT Ltd 1999 Imperial College 22 Infinitesima Ltd 2001 Bristol University 23 Kelvin Nanotechnology Ltd 1997 University Of Glasgow 24 Lein Applied Diagnostics 2003 UMIST

25 Mesophotonics 2001 University Of Southampton/ BTG

26 Microemissive Ltd 1999 Univ Of Edinburgh, Napier University

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27 Microrheology Ltd 2002 University Of Bristol 28 Microsaic 1998 Imperial College 29 Microstensil Ltd 2003 Heriot-Watt University 30 Microtest Matrices 2002 Imperial College 31 Molecular Photonics Ltd 1995 University Of Durham 32 Molecular Profiles 1997 Univ Of Nottingham 33 Molecular Vision 2001 Imperial College 34 Nanobiodesign Ltd 2001 Imperial College 35 Nanoco 2001 University Of Manchester 36 Nanograph Ltd 2003 University Of Nottingham 37 Nanomagnetics 1997 Bristol University 38 Nanosight Ltd 2002 Independent 39 Nanotecture Ltd 2003 Southampton University 40 Nitech Solutions Ltd 2003 Heriot-Watt University 41 Orla Proteins 2001 University Of Newcastle 42 Oxford Biosensors Ltd 2000 University Of Oxford 43 Oxford Gene Technology Ltd 1995 University Of Oxford 44 Oxonica Ltd 1999 University Of Oxford 45 Patterning Technologies 1997 Jetmask Limited 46 Peratech 1997 University Of Durham 47 Plastic Logic Ltd 2000 University Of Cambridge 48 Printable Field Emitters Ltd 1995 Aston University/RAL 49 Psimedica Ltd 2000 Independent

50 Scalar Technologies Ltd 1999 Univ Of Edinburgh, Heriot-Watt University 51 Sensor Technology & Devices Ltd 2000 Univ Of Ulster

52 Smartbead Ltd 2000 Univ Of Cambridge/Sentec Ltd. 53 Softswitch Ltd 2001 Peratech Ltd And Wronz Inc 54 Solexa Ltd 1998 University Of Cambridge 55 Strathophase Ltd 1999 University Of Southampton 56 Syrris Ltd 2001 Independent 57 TDL Sensors Ltd 1999 UMIST 58 Toumaz Technology 2000 Imperial College 59 Vivamer Ltd 2002 University Of Cambridge 60 West Micro Technologies Ltd 2003 University Of Birmingham

Table 1: Start-ups included in the Study

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8. DATA GATHERING AND RESULTS

8.1 Introduction Most of the interviews and data collection was conducted between 20th May and 20th July 2004. The data collection followed the methodology set out in chapter 7 – a combination of qualitative and quantitative approach based on semi- structured interviews. The quantitative data is collected under the following categories:

Age of the Company Number of Employees Source of Seed Funding VC funding raised Number of patents Geographical location of the start-up Composition of management board Business Model Adopted

8.2 Summary of the data collected

8.2.1 Formation of the Start-up

02468

10121416

Number of Startup

Companies

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8.2.2 Number of Employees

02468

101214

Number of Startups

1 to 4

5 to 8

9 to 1

2

13 to

16

17 to

20

20 to

30 < 30

Number of Employees

Employee Distribution

Number ofStartups

Figure 11: Number of Employees

As expected statistics show that 60% of start-ups have less than 10 employees in the initial phase of their development. The growth of the company can be said to be analogous to the number of employees. The number of employees in the start-up depends highly on the amount of Venture capital funding obtained because human capital comes at a high cost. Moreover, Micro and Nanotechnology firms require a multi disciplinary work force. Few start-ups were found to have part-time employees especially in the cases where the academic entrepreneur was still attached to the university.

8.2.3 Source of Seed Funding

Source of Seed Funding

39%

4%18%

39% SMARTSMART ExceptionalUniversity Challenge FundsOthers ( Private & Angels)

Figure 12: Source of Seed Funding

MNT companies usually have significant capital requirements to make real progress. Many start-up companies gain some of their first funding through various grants from government agencies like Department of trade and Industry (DTI).

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43 %( 39% + 4%) of the start-up companies were found to receive SMART or SMART Exceptional Award. This shows that the SMART Award was widely used by the start-ups. SMART awards are Government grants, given to establish the feasibility of innovations and inventions and to help the development of products through to the pre-production state. SMART Award

Name

% Entitlement

Max Amt of Grant

Max Total Project Costs

Max Funding required from other Sources

Micro 50% £20,000 £40,000 £20,000

Research 60% £75,000 £125,000 £50,000

Development 35% £200,000 £571,429 £371,429

Exceptional 35% £500,000 £1,428,571 £928,571 (Dated: June 1ST 2003)

Table 2: SMART Award Categories

39% of the start-up companies were found to be funded from Private Sources and Business Angels. Business Angels: Business angels are individuals who invest their own personal capital in and bring entrepreneurial know-how and managerial experience to start-up enterprises. Business angels use their own knowledge and experience in a particular field when deciding whether to invest, and can have a leveraging effect for other sources of funding including bank loans and formal venture capital. There are three different levels of business angel networks:

National Network e.g. the National Business Angel Network Regional Network e.g. the Great Eastern Investment Forum in the East of England Informal Syndicates e.g. Cambridge Angels

About 18% of the start-ups received their seed funding from University Challenge Funds. University Challenge Funds (UCFs): They were set up in 1999 to provide proof of concept and seed finance to develop promising university IP. Some £61m was raised in two investment rounds including £40m public funds. The scheme was intended to encourage the development of IP that could either be licensed to industry or used to create a spin-out. But in practise resources were strongly focussed on early stage investments in spinouts. In 2001, over 70% of the Funds’ investments were between £100,000 and £250,000 in value – more than is normally required for proof of concept funding. The availability of UCF Funding has been one of the main drivers of the increased spinout activity since 1999. Some of the University Challenge funds are University of Cambridge Challenge Fund and the Combined London Colleges University Challenge Seed Fund. Details of the University of Cambridge Challenge Fund:

Fund Size = £4 Million Investment Range = £10k to £250k Investment Areas : University Based Start-ups URL : www.challengefund.cam.ac.uk

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8.2.4 VC Funding Raised

05

101520253035

Number of Startups

0 to 1 1 to 5 5 to 10 10 to 15 >15

VC Funding Obtained (Million GBP)

Total VC Funding Obtained

VC Funding Obtained

Figure 13: VC Funding Raised by start-ups

Venture capital: Venture Capital provides long-term, committed share capital, to help unquoted companies grow and succeed. Venture capital is invested in exchange for a stake in the start-up and, as shareholders; the investors’ returns are dependent on the growth and the profitability of the start-up. 50% of the MNT start-ups in UK had none or less than 1 Million pounds in Venture Capital. However a certain concentration of start-ups received a phenomenally high amount of VC Funding. For example, the top 8 MNT start-ups included in this study had raised £ 230m amongst them. This shows a concentration of the investment by the Venture Capitalists. A similar trend is seen in the US as well: According to Lux Report 2004, 109 nanotech startups in the US have secured VC funding since 1998, representing 119 deals and $1.1 billion in total financing. Five percent of venture-backed nanotech startups have received 22% of total funding. The top five nanotech start-ups by venture capital raised are Catalytic Solutions, Nanosys, Quantum Dot, Molecular Imprints, and Frontier Carbon. Together, these companies have raised more than $246 million in VC funding since 2001, representing roughly 22% of total nanotech VC funding. There are two issues worth discussing here:

The main issue regarding the Venture Capitalists was the attitude of the academic entrepreneurs towards them. A high number of start-up founders are still affiliated to the university. These founders were very sceptical about the Venture Capitalists. This was predominantly the trend in UK universities where Venture Capitalists are not widely accepted as in the US.

The Venture capitalists adopted a cautious stance in their approach towards MNT after the internet bubble. However detailed analysis of this aspect is beyond the scope of the report.

One of the most well known forms of funding is through VC’s. There are about 9 VC’s in Cambridge that have funded “MNT” deals. The most active and visible of these is 3i which has invested in several MNT startups. Looking across the entire UK, some of the most prominent “MNT VCs” are: Generics Group,IP2IPO, Sulis ,BTG , Quester, Prelude Trust, Amadeus Capital Partners, TTP Ventures. Many other VC’s have an interest in nano as the “next big thing” but have not made investments yet. A recent example of a nano company that successfully raised £2.1Million in Venture Capital from two VC’s is Nanotecture.

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8.2.5 Number of Patents Granted

0

5

10

15

20

Number of Startups

0 to 5 5 to 10 10 to 15 > 15

Number of Patents

Patent Distribution

Number of Startups

Figure 14: Number of Patents Granted

In certain industries, patents are not critical to business success – firms could focus more on swift execution rather than on intellectual property (IP) protection. This was definitely not the case for micro and nanotech firms. IP had been a central issue to every MNT start-up that was analysed. IP was a very important topic in the realm of nanotechnology commercialization. It was found that the inception of a MNT Start-up company was synonymous with the acquisition of the start-up’s initial IP. An analogy could be drawn between the importance of IP in MNT and biotech. 60% of the start-ups had up to 5 patents. About 20% of the start-ups had 15 or more patents. Since patent filing is a long and a cumbersome process, many start-ups had several patents pending. Hence these statistics can be expected to change frequently. However, the importance of IP to MNT firms cannot be undermined. A trend in the increase in the patents is seen in the UK as well as world wide. In the US in 2000 there were 293,000 patents filed while in 2006 it is estimated that there will be 538,000 patents filed – almost doubling in six years. Nanotech patents issued have been increasing at a higher rate. In 1998 there were about 350 nano patents issued while three years later in 2001 there were over 700 nano patents issued. This increase in patents being filed and issued is driven by multiple factors. One of those factors is the increased use of aggressive IP tactics such as “patent ring fencing”. In this technique, the aggressor company issues many incremental patents that surround the defending companies IP. This creates a deadlock situation were neither company can use their IP without infringing on the other companies IP. They are therefore forced to cross license to each other. This essentially gives the aggressor access to the defending companies IP. With tactics like this being employed, it is becoming very important for companies to have strong IP positions in the technologies that are important to their business. This means not having single patents filed but rather having a layered approach to IP filing. Patents should be filed, if possible, to protect the following levels: composition of matter patents, process patents, and finally application patents.

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8.2.6 Geographical Location

Figure 15: Geographical Clusters in MNT

Start-ups can be categorised into cluster or non-cluster companies based on their background that is whether they started in a cluster or formed independently without any cluster support. From the map above, it can be said that 6 MNT clusters have been formed in the UK:

Cambridge – Largest cluster of MNT start-ups in UK London Oxford Durham Edinburgh Manchester

A strong concentration of MNT companies is found in these regions. Growth of a start-up, may be based on internal or external resources i.e. firm specific or firm addressable assets(Bellini 1999).The difference between available resources and needed resources can be named the Resource Gap. One factor propelling the growth of a new company

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is to form a resource network or a cluster for the purpose of securing availability of external resources for the use of the new company. Thus the company growth and the network growth are related to each other. The small firms can and do exchange critical ‘resources to stay small but act big’ through resource network participation. Overview of the Largest MNT cluster in UK: Cambridge Technopole

Population: 454,000 Geographic Area: 176,000 ha Number of high tech firms: 3,500 Employment in high-tech firms: 50,000 Number of universities: 3 Key Technology sectors: Information Technology, mobile telecommunications,

biotechnology, electronics, instrumentation, nanotechnology, inkjet printing.

Cambridge Technopole is the geographic area of intense high technology innovation activity encompassing the City of Cambridge .It has been acknowledged as one of the world’s leading high technology business clusters by publications including Time , Fortune and Wired. Time recently assessed the top 50 ‘hottest’ high tech firms in Europe – 9 of which are based in Cambridge. Cambridge Technopole area makes a contribution of £7.6 Billion GVA (Gross Value Added) to the UK Economy

8.2.6.1 Characteristics for High Technology Clusters Universities and Centre of Academic Excellence Entrepreneurs with marketable ideas and products Business angels and established seed funds Sources of early stage venture capital Core of successful large companies Quality management teams and talent Supportive Infrastructure Affordable space for growing businesses Access to capital markets Attractive living environment and accommodation

(Source: Allan Barrel, 2004)

8.2.7 Composition of Management Board Percentage of Start-up Founders taking Chief Executive Role: 30% Percentage of Start-up Founders taking Chief Research / Chief Scientific officer Role: 70% The companies covered fall into two distinct groups: Start-ups headed by the founder The first group was those where the founders have sufficient commercial experience to head up a management team themselves. Start-ups where the founder takes a sub- ordinate position Start-ups coming straight from university, usually after a trial period supported by seed capital , tended to follow a standard path in the move from a research entity to a fully fledged manufacturer.

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Most of the start-ups were the brainchild of a single person, usually a university

professor who had been working on the technology in an academic environment for many years.

The founder had in each case taken the post of chief Scientific/Research officer, with an outsider, frequently proposed by the capital provider, being brought in as the CEO.

The next additions to the team were usually production and marketing managers, usually chosen for a track record of success in a similar field.

The companies in the university spin-off category were at too early a stage in their growth to predict whether this would be a successful model. However, the ‘founder as CSO (Chief Scientific Officer)’ model could lead to problems, where there is no meeting of minds between the CSO and the commercial outlook of the CEO. This could be especially so where the founder has a reserved chair at his/her former university to fall back on. Attribution of the failure of Ilotron was analysed to be in large part due to the lack of understanding of the potential and requirements of the technology by the VC imposed management team. Problems may also occur where it becomes necessary to move the founders from the CEO role to a research role and to appoint someone new as the leader. It seems therefore that the majority of founders have the vision identified by Moss Kanter (1988) as a pre-requisite, but need the support of a team to achieve success.

8.2.8 Business Model Adopted

0

5

10

15

20

25

30

35

Number of Startups

Inhouse Design &Inhouse

Manufacture

Inhouse Design &IP Licensing

Consultancy and R& D

Materials Supplyand Equipment

Business Models Adopted

Business Models Distribution

Business Models Adopted

Figure 16: Business Model Adopted

A number of different businesses models employed in Micro and nanotechnology start-ups. IP licensing and In house design is the emerging business model adopted by 60% of the start-ups. These are in areas where there are large incumbent players such as memories, storage, and displays. The IP licensing model has the advantages that it allows the micro and nanotech start-up company to avoid the expense of setting up manufacturing and sales channels – both expensive propositions. The way the IP licensing model works is that a company develops IP, then licenses

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it to other companies for commercial applications and finally collects a royalty on the use of the IP. The royalty revenue is then used to fund more IP creation. The downside to the IP licensing model is that it is difficult to be really successful with it. Consider some examples from other industries such as semiconductors. Rambus is an IP licensing company that had a large amount of success for a period. They licensed IP that was used in the design of high-speed memories for computers. But with their success came motivation for their licensees to find alternatives, which they did, thus, diminishing Rambus’ potential going forward. This type of scenario is likely to also happen in the micro and nanotech arena. Therefore it will be important to ensure very strong IP protection for micro and nanotech companies that are taking this approach.

8.2.8.1 Different MNT Business Models: Nanotechnology is in a very nascent phase and hence a clear picture of the Business Models has not yet emerged. However, the Microsystems field has developed substantially and these are the most common business models observed.

Component Manufacturers - Contract Manufacturer: It is very challenging to reach a good industrial yield for the

contract manufacturer. Many Packaging and testing issues are to be resolved. MEMS component manufacturers suffer from the MEMS Law: One device One process!

- Foundries: Generally not followed by MNT start-ups.

- Materials Supply and Production

- Off the shelf Components: Used mostly in MEMS industry.

Design Companies

- Engineering and Design - Consultancy and R & D

- IP Licensing / Fabless: Fabless companies seem to be a viable business model.

They are able to sell design work and the devices and thus create recurrent sales. A key challenge is to have access to commercially viable and open fabs( the so called ‘foundries’).

System Manufacturers

- Integrated Foundries: They use existing internal manufacturing facilities in order to access key technologies. It is difficult and time and money consuming to maintain an up-to-date fab as there is no possibility to share fab costs on different markets.

- External MEMS FAB with internal R&D: These take the benefit of the existing MEMS

infrastructure. However, the challenge is to find partners that are able to produce the developed devices without a high nonrecurring engineering (NRE) cost (For any semiconductor product, design is part of the nonrecurring engineering (NRE) cost—the fixed cost of development and production.) Another challenge is to fund the new developments and to protect the developments from the competitors.

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9. PERFORMANCE MEASURES AND SUCCESS ANALYSIS

Discussion of Success of Micro and Nanotechnology Start-up Companies: To identify the most successful companies, a comparison of the age of the company with the size of the company along with the Venture Capital Raised was done. These results are used to classify the start-ups in the categories of high growth and slow growth. A detailed qualitative analysis of a selection of high growth (8 start-ups), low growth start-ups (4 start-ups), 3 companies which had stopped trading was then performed. This analysis resulted in a set of criteria which could lead to the success of a start-up venture.

Figure 17: Age vs. Number of Employees vs. Venture Capital Raised

The size of the bubble in the graph indicates the size of the Venture Capital Funding.

High Growth Line

Low Growth Line

£5m £10m £20m

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Selection of High Growth Companies in MNT from the graph:

Table 3: Selected High Growth Start-ups

The figures in the bracket () for Profitability indicates loss. The figures are for the latest reports filed by the companies with the Company’s House .

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Selection of Slow growth Companies in MNT from the graph:

Table 4: Selected Slow Growth Start-ups

The figures in the bracket () for Profitability indicates loss . The figures are for the latest reports filed by the companies with the Company’s House .

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Companies no longer trading in MNT:

Table 5: Companies No longer trading in MNT

9.1 Discussion: Success Criteria for the Start-ups in Micro and Nanotechnology

9.1.1 Generic Model of Profit / Loss The first success of a firm is its birth. A significant portion of those attempting to establish a business fail. The graph explains the trajectory which a start-up company normally follows after its inception.

Figure 18: Generic model of Profit / Loss

The company starts with an initial capital investment and seed funding. Depending upon the funding needs, the company may secure loans or raise Venture Capital Funding. Hence, the start-up keeps on digging deep into the negative region. The company then starts generating initial revenue and then it reaches the first turning point i.e. Milestone 1. At Milestone 1, the profit/loss trajectory of the start-up changes its direction towards the positive. However, it should be noted that the company is still not in the overall profit because it is still in the negative area. The change in the direction of the trajectory is only because the company has started generating revenues for that phase.

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Depending upon the rate of revenue generation (can be termed as Profit Generation for that period of time) the company reaches the Milestone 2 which is the most significant milestone. This indicates that the company has reached the Break Even Point and the Payback phase starts. After reaching the Break Even Milestone, the company can concentrate on its growth. Milestone 3 is reached when the company starts to generate significant profits and is on its way to become a larger entity. It was found from the study that all of the high growth start-ups in the MNT sector were still unprofitable. This is a typical characteristic of a high technology start-up. Three high growth Start-ups: CDT Ltd, Solexa Ltd, and Micro emissive Ltd have been marked on the graph. (Note: It is early to term them as successful. But they were successful to attract high Venture Capital and consequently attained high growth). All of them of them were thriving on the Venture Capital raised by them. Hence over funding does not necessarily mean a successful company. Over funding might allow the company to follow a flawed strategy for a long time.

9.1.2 Case Study of a high growth start-up : Cambridge Display Technology Ltd

Description of CDT: Cambridge Display Technology Ltd is a developer of organic molecules for display applications. It is a spin-out from University of Cambridge. Its technology is considered to be potentially disruptive for next-generation displays. Its key asset is an extensive portfolio of intellectual property covering materials and processing know-how, when it licenses to manufacturing partners to generate revenue. It has key relationships with its partners like Bayer AG, Dow Chemicals, ST Microelectronics. It is one of just two companies – the other being KODAK – with a sizable portion of the patent pie surrounding OLED technology. This technology is promoted as the successor of the liquid crystal display technology or LCD, which is commonly used in mobiles, laptops and other consumer electronic devices.

Key issues concerning CDT: Commercialisation is largely in hands of its licensees and partners. CDT owns some of the key IP in the field of polymer organic light emitting diodes, or polymer OLEDs. But polymer OLED technology is just one route to next generation displays. Manufacturers might license competing technology or develop their own type of OLED or other display device, leaving CDT and its IP portfolio out in the cold.

CDT Ltd 1995 1996 1997 1998 1999 06/2000 12/2000 2001 2002 2003 Number of Employees

7 18 21 27 39 62 83 98 121 121

Turnover(£m) 0.69 0.37 1.4 0.8 0.13 22 1.9 4.2 Profit/Loss(£m) -0.7 -1 -0.7 -1.5 -1.9 -6.8 -4.5 4.5 -16.7 -8.8 Cumulative Profit/Loss(£m)

-0.7 -1.7 -2.4 -3.9 -5.8 -12.6 -17.1 -12.6 -29.3 -38.1

Cumulative VC Funding(£m)

0 0 10 10 149 149 149 178 178 178

Cumulative P/L & VC (£m)

-0.7 -1.7 -7.6 6.1 143.2 138.4 131.9 165.4 148.7 139.9

Table 6: Financial Table for CDT Ltd

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-50

0

50

100

150

200

1995 1996 1997 1998 1999 06/2000 12/2000 2001 2002 2003

Turnover(Millions)Profit/Loss(Millions)Total VC FundingNo. Of Employees

Figure 19: Comparative graph of CDT Ltd

-50

0

50

100

150

200

1995

1996

1997

1998

1999

06/20

00

12/20

0020

0120

0220

03

Cumulative P/L (Millions)

Cumulative P/L&VC Funding(Millions)

Figure 20: Cumulative Profit/Loss of CDT Ltd

CDT has raised a phenomenal Venture Capital Funding of 178 Million GBP. This was by far the largest Venture Capital funding of all the Micro and Nanotechnology companies in the UK. This was possible because of the strong management, strong Intellectual property base and the disruptive nature of its technology. As the increase in venture capital increased over the years, the number of employees as well as the assets increased steadily. The point to be observed here is that the company was not yet profitable even after 12 years of operation. The company has still not even reached the first milestone of changing the direction of the profit/loss trajectory. This was the case with most of the start-ups in the MNT sector. The high tech start-ups survive on the venture capital raised by them till the point they start generating revenue.

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9.2 Success Factors for MNT Start-ups in UK Creating a new start-up requires a long and a complex process in order to transform an idea into a viable company. (Sijde and Tilburg, 2000) Success of the Start-up may not be attributed to one single success factor. It is a combination of factors which is responsible for the success of the start-up. A success factor in one phase might very well be a failure in another phase. Also, some variables may be more important in one phase and less important in another phase. Moreover, growth of a company also depends on factors affecting the ability to grow, willingness to grow and opportunity to grow (Davidsson 1990). The following are the factors which were derived by observing the characteristics of the high growth and slow growth start-ups.

9.2.1 Management of the Start-up The management of the Start-up was found to be very important in strategic planning and generating a business model as well as a strategy for the growth.

9.2.1.1 Commercial Experience of Founders: Commercial experience of the Founders with strong target market knowledge was found to be a very important factor in the Funding as well as the Growth phase of the start-up. 70% of the high growth case start-ups were headed by a non- academic commercial manager. The amount of time that an academic CEO could provide for the start-up was seen as a major impediment to the growth of the start-up. For a company to pass the funding stage, they usually need to prove convincingly that they have a micro technology or nanotechnology that would have a high market potential. But taking that raw technology to a market is a different skill set than developing the technology in the first place. The commercial experience of the Founders was found to be the very useful here. The commercial experience of the founders also helped to target the right market for the technology. It was found that many companies that had created a nano-based technology with a target market in mind did not meet the needs of that target market. This oversight may be attributed to the lack of the domain knowledge of the management team. For example, Nanomagnetics Ltd, which is a spin-out from Bristol University. Dr. Eric Mayes is the CEO and founder of the start-up. It had initially focussed on data storage but it now also focuses on Medical Imaging and Water Purification.

9.2.1.2 Composition of Management Team: Another success factor observed was that of a well-balanced team – or at least having a plan to put one in place in the future in case of a boot-strap start-up. There were two aspects to a well balanced team that were perceived as important to a MNT start-up:

The team needed to have the multi-disciplinary skill-sets that were required to accomplish the business plan goals. It was observed that some founding teams had all the members that were from the same academic discipline but the product required a multi-disciplinary team to execute. An example of this was a micro-array company started by two geneticists. Their planned product required a significant amount of MEMS and electrical engineering talent to be designed but that knowledge was not present in the founding team.

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The other aspect of a well-balanced team was having senior people who came from the

domains where the product will be sold. For example, if a nano-based memory company was being formed, then having a founder who originated from the semiconductor memory space would be very essential. Without this in place, the company would be in a danger of developing products that would not appeal to the marketplace due to lack of market knowledge. The company could be blind-sided by an incumbent technology that could challenge the benefits of the new nano-based technology. Hence having a founding team member with contacts into the business space helps facilitate both sourcing relationships and also generating first sales.

An example of this is an Optical MEMS company, Mesophotonics Ltd .It is a spin-out from Southampton University which concentrates on Photonic Crystal Technology. It has managed to raise £8.3m in Venture Capital funding. It has an executive which has long previous relationships from Nortel Technology. The former relationships of this executive in the optical industry are ideal for this company both on the supply side and on the sales side.

9.2.2 Affiliation with the University:

9.2.2.1 Links with the University: The links with the academic institute was another factor which was found to help the start-ups progress. The involvement of the Universities in the spin-out process was generally confined to the pre-start-up phase and the initial post-start-up phase rather than the later stages. From the interviews, the following areas were found to have greater involvement of the universities than the founders of the spin-out:

Carrying out intellectual property due diligence Developing a professional group Obtaining alternative sources of funding Interfacing with financiers

On the whole, it was also found that the founders had more involvement in formulating strategy and monitoring financial performance than the university. Many start-ups in nanotechnology get at least their initial IP from universities or government labs. Universities have offices that focus on the commercialization of their locally generated IP. Cambridge University funds a organization called Cambridge Enterprise to help in this process of promoting university’s IP. It is the legal entity that holds patents on behalf of the University, receives royalties from licensing agreements, and holds equity in spin-out companies.

9.2.2.2 Reputation of the University: The reputation of the university played a very important role in attracting Venture Capital investment. The reputation of the University was also be an important variable that affected the licensing versus Spinout decision. Di Gregorio and Shane (2003) have empirically shown that intellectual eminence of universities attracted Venture capital. It was seen that most of the high growth start-ups were seen to be affiliated with the top academic institutions in UK. University of Cambridge has a strong reputation for spinning out ventures. High growth start-ups like Cambridge Display Technology Ltd, Solexa Ltd, Plastic Logic Ltd were spin-offs from Cambridge University.

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9.2.3 Financial Aspects

9.2.3.1 Position on the profit-loss curve: Most the high growth as well as slow growth start-ups were not profitable. This was a common scenario for a high-tech start-up. The relative position of the company on the profit-loss curve gave a fair estimation of the progress and the growth of the company. Even the top MNT start-ups in the UK were still not profitable. The relative position of 3 start-ups has been marked on the graph in section 9.1.1. All of them were surviving on the Venture Capital Funding raised by them to fund their growth. A company which was said to reach the first milestone could be said to be revenue generating firm. However, only after the attainment of the second milestone, can the start-up be termed as profitable.

9.2.3.2 Venture Capital Raised: The venture capital played an important role in the growth of the start-up. All except one of the high growth companies had raised exceptionally high amounts of Venture capital. The venture capital helps the company to fund its business plan. The decision of funding the company through venture capital is a strategic one. It was found that the venture capital was not meant for every model of the start-up. It was found that the venture capital was most effective for the start-up when the following conditions prevailed:

A big market opportunity for the product A defensible competitive advantage Growth that demands external capital A founding team was willing to bring external talent A collective vision that was ambitious enough to build a large (usually global) company.

The most successful MNT Company in raising venture capital was Cambridge Display Technology Ltd. It is a spin-off from University of Cambridge. It is the leading company in Polymer Light Emitting Diode Technology. It has raised about £178m of venture capital in about 3 rounds of funding to date. It was known that the company intended to float an IPO on the NASDAQ in October 2004. With the help of the Venture Capital, CDT Ltd has become a 121 employee company and procured new office space and laboratory equipment. A team with strong commercial experience addressing a large market opportunity was attractive for obtaining the VC funding. A strategy which involved including “luminaries” with the start-up company also proved to be attractive to the VCs. Ty